In case filing for Chapter 11 bankruptcy wasn't enough of an indignity for Sears, the largest mall owner in America is signaling to investors that malls will be better off without the storied retailer.
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| There aren't many Sears stores left in PREIT's portfolio of malls. |
Simon Property Group Inc. CEO David Simon on Thursday addressed Sears' long-awaited decision to seek bankruptcy protection, a typical precursor to liquidation. The company is closing at least 142 stores.
Simon paused to be mournful.
"It's a tragic set of events that a company that's been around for so long is in this state of affairs," Simon said during a conference call with analysts. "It wasn't that long ago — 10, 12 years ago — that 300,000 people worked at Sears. So, I mean, I think we should put that in perspective."
It is appropriate to say a kind word about Sears, a company that started out 132 years ago and survived extreme economic swings and changing consumer tastes. As Josh Barro wrote for New York Magazine and Derek Thompson wrote for The Atlantic, it is unfair to remember Sears solely for its failure to adapt to online shopping after the company achieved more than a century of greatness.
One of Sears' innovations was pivoting from catalog sales to brick-and-mortar department stores, which became a defining feature of shopping malls. Now that Sears is filing for bankruptcy, though, Simon's malls will lose dozens of Sears stores.
That could reasonably be understood as a bad thing. But Simon is arguing that Sears' demise will help his company in the long run.
"We're putting Sears in our rearview mirror," he said. "... We think this is a unique opportunity. We're going to redevelop (Sears stores). We're going to reinvest in the communities. We're going to be able to drive traffic now from this box. Put all of that aside, we're going to be able to make money on this."
Simon's point is that the company will be able to take the large department store spaces occupied by Sears, divide them up and lease them to more stores at a higher price per square foot.
This outlook defies the traditional concept of the shopping mall. Sears occupies what is known as anchors, the large stores at each end of malls, which generate foot traffic and push sales toward smaller retailers inside the mall.
Sears' bankruptcy comes at a time when the department store model is in trouble. Bon-Ton Stores filed for Chapter 11 bankruptcy earlier this year, resulting in five Carson's closing across Indiana. Macy's also has been steadily closing stores, including a location in Terre Haute earlier this year.
It's been clear for some time that malls can no longer rely on stores such as J.C. Penney. But now that Sears is standing at death's door, Simon is willing to say that out loud.
"The mall of the future doesn't need five, six, three — it depends on the mall — but doesn't need the department stores," Simon said. "And then, the ability to reclaim that allows us to densify the properties and I think we have that opportunity in a rather large scale."
This is a big shift in thinking. In a sense, Simon is saying is that malls are prepared to do what Sears couldn't do: adapt to modern shopping behavior.
Indianapolis-based Simon Property Group, which reported 95.5 percent occupancy for its properties at the end of the third quarter, is projecting that leasing demand will increase in the coming months. Simon noted some online retailers — think UNTUCKit and Warby Parker — are moving into malls.
There is reason for skepticism that an uptick in small, niche stores can attract shoppers in the same way that department store behemoths have in recent decades.
The reality is no one knows what will become of malls. Competing theories include the possibilities that retail space will turn into entertainment venues, gyms or public meeting spaces. Washington Square Mall on Indianapolis' east side — once owned by Simon — has partially become a flea market while retaining a few national stores.
For mall owners, the loss of Sears will be yet another step toward reinvention. Simon pointed to his company's track record as a reason to trust his outlook on Sears.
"This will be fine for us," Simon said. "We'll add value to the real estate. We wish it would have been done in a different manner, but we have to confront what we have to confront. And I think we'll make this — it'll be an opportunity for us just like everything else we've dealt with over the last 25 years as a public company."
As Sears' history shows, industry change brings opportunity — until the day you fall behind.
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